An apparent easing by the Federal Reserve boosted short-term Treasury prices yesterday, while the specter of next week's refunding supply left long-term prices slightly lower.
Late in the afternoon, the 30-year bond was off 1/8 to yield 7.89%, and short-term notes were 1/8 point higher.
Even though fed funds were trading a little below the 5 1/4% target, the Fed stayed out of the market yesterday morning, and traders decided that was a signal the Fed had lowered its target 25 basis points, to 5%.
Most analysts seemed inclined to call it an ease, but they pointed out that staying out of the market was not the way the Fed usually signaled policy changes. In the last two years, the Fed has almost always let the market know it was cutting the funds target by doing repurchase agreements.
And since yesterday was the last day of a maintenance period, when fed funds often swing widely, it was
Treasury Market Yields
Wednesday Week Month
3-Month Bill 4.95 5.16 5.22
6-Month Bill 5.02 5.30 5.35
1-Year Bill 5.08 5.39 5.40
2-Year Note 5.69 5.98 5.99
3-Year Note 5.99 6.24 6.23
4-Year Note 6.14 6.37 6.40
5-Year Note 6.76 6.96 6.90
7-Year Note 7.14 7.35 7.24
10-Year Note 7.45 7.66 7.46
15-Year Bond 7.74 7.88 7.72
30-Year Bond 7.89 8.07 7.82
Source: Cantor, Fitzgerald/Telerate
impossible to tell what had happened by watching how funds were trading, economists said.
The Fed's inaction "smacks of an ease," said Anthony Karydakis, a senior financial economist at First Chicago. "But Fed action on a settlement day can be very tricky to interpret."
Mr. Karydakis said it was odd that the Fed would choose to send a "hidden message" by staying out of the market when it could have made its intentions clear by even a small addition of reserves with repurchase agreements.
But Michael Moran, chief economist at Daiwa Securities, said the Fed might have acted subtly in order to suggest a 25-basis-point move, instead of the 50-basis-point cut that traders were talking about Tuesday.
Analysts said that it was a waste of time to worry too much about exactly what the Fed was up to yesterday, since evidence of economic weakness has been piling up recently and Fed Chairman Alan Greenspan made it clear Monday that he was taking the indicators seriously.
"If [Fed easing] didn't come today, it will be readily apparent in the next few days," said Carol Stone, a senior economist at Nomura Securities.
While the Fed stayed out of the market during the morning, it came in twice during the afternoon, but analysts said both those moves were technical.
Early in the afternoon, the Fed announced it was buying bills for its system account. Analysts said the purchase was a technical move the Fed usually makes at this time of year to offset the pressures on reserves associated with the upcoming holiday season.
Later in the afternoon, when the Fed said it would add reserves today with system repurchase agreements, short-term prices moved higher as some traders decided the Fed was confirming it had eased.
But analysts said the Fed needs to add a huge amount of reserves today because two-year and five-year notes and bills are all settling today. Yesterday's early warning was just an effort to ensure a smooth addition of reserves and had nothing to do with monetary policy, they said.
Jerry Gluck, an economist at Mitsubishi Bank, estimated the Fed needs to add $12 billion in reserves today. "Given an add need of that size, it's not unusual for the Fed to preannounce [repurchase agreements]."
Speculation about Fed policy overshadowed what was supposed to be yesterday's big event, the Treasury's refunding announcement.
As expected, the Treasury will sell $38 billion of notes and bonds next week, unchanged from the last quarterly refunding in August. And despite some speculation that the government might sell more short-term paper and fewer bonds, the auction sizes were also unchanged: $14 billion of three-years and $12 billion each of 10-year notes and 30-year bonds.
The sales will raise $17.8 billion of new cash.
Some traders who had placed bets on a smaller bond issue were disappointed and sold bonds to buy 10 years after the announcement, a government note trader said.
Today's initial claims and September factory orders numbers will be overshadowed by tomorrow's October employment report.
A bond trader predicted a round of profit-taking ahead of the jobs data. "I think people [who are] long or long their index possibly may lighten up and look for an opportunity to get securities back at the auctions," he said.
But Mr. Karydakis said expectations of a favorable employment report would keep a bid in the market. "The path of least resistance is to the upside," he said.
The consensus forecast for the October jobs report calls for a 25,000 gain in nonfarm payrolls and a 0.1-point rise in the unemployment rate, to 6.8%.
As economists wrangled over the fine points of Fed watching yesterday, the market got another dismal economic report.
September home sales plunged 12.9%, when economists had been expecting a decline of about 1%, and August's gain was revised sharply lower to 1.8% from the 6.7% reported last month.
Analysts said the weakness in housing was particularly disturbing becausee it occurred even though mortgage rates were at low levels.
Yesterday's other number, September personal income and spending, showed more strength than expected. September income was up 0.5%, above the consensus forecast of a 0.4% gain, and spending jumped 0.9% whent he market was looking for a 0.5% gain. But the strength was partly offset by downward revisions in previous months, and analysts were suspicious of the surge in spending, much of which was in services.
The December bond future contract closed 1/8 higher at 99 30/32.
In the cash market, the 30-year 8 1/8% bond was 3/32 lower, at 102 15/32-102 19/32, to yield 7.89%.
The 7 7/8% 10-year note rose 5/32, to 102 23/32-102 27/32, to yield 7.45%.
The three-year 6 7/8% note was up 5/32, at 102 5/32-102 7/32, to yield 5.99%.
In when-issued trading, the 30-year bond to be sold next Thursday was bid at 7.88%, the 10-year note to be sold Wednesday was offered at 7.46%, and the three-year to be auctioned Tuesday stood at 6.06%.
Rates on Treasury bills were lower, with the three-month bill down six basis points at 4.83%, the six-month bill off eight basis points at 4.84%, and the year bill seven basis points lower at 4.84%.